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Wednesday, January 2, 2008

Intel downgrade may set up buying opportunity but not right away

Intel (INTC) was downgraded by Bank of America and the stock was under pressure all day. The BofA analyst feels that, despite Intel's current situation being nearly ideal, upside is limited. With competition from AMD wilting, the things holding Intel back could be slowing demand due to seasonal weakness and rising costs. After today's ISM numbers, I would add to that the threat of a slowing economy.

From the SIA Global Sales Report for November, however, we have the following:

"Microprocessor sales increased by 5.8 percent month-on-month and by 7.4 percent from November of 2006. Strong PC unit demand contributed to a 2.6 percent sequential increase in microprocessor unit shipments and a 3.2 percent increase in ASPs." In this usage, ASP means average selling price.

What the SIA is saying is that in the microprocessor sector, sales are doing well and manufacturers are able to pass higher prices on to customers. This is not the case in many other semiconductor sectors, especially memory chips. Intel seems to have two big advantages in being the dominant player in microprocessors and having pricing power that other semiconductor companies can't match.

The Durable Goods report for November indicated new orders for Computers and Related Products were up 9.8% over the previous month. This will certainly lead to a strong fourth quarter for Intel. The question is: what about the future quarters?

The best data point we have at the moment might be the December 2007 Manufacturing ISM report which was released today. In general, the report paints a depressing picture, with a downward trend continuing and driving the PMI Index below 50 to 47.7, a level associated with a contracting economy. There are bright spots, however. Computer & Electronic Products was one of five categories that registered an increase in New Orders during December. It also showed growth in Production, in Inventories and in Export Orders. Ominously, Computer & Electronic Products was not among the categories that showed growth in Employment nor was there growth in the Backlog of Orders. It was among the categories that paid higher prices for materials.

In general, the case for a slowing economy is now stronger but it still appears there are factors that indicate that the tech sector has the potential to outperform other sectors. Intel is one of the strongest players in the tech sector but they would still see some demand weakness if the general economy contracts. Reduced demand would most likely impact the company's envied ability to pass on cost increases to its customers.

With Intel's deep pockets and domination of the microprocessor industry, the company should not be counted out. Some might say that Bank of America is being overly pessimistic but it could just as easily be said that they are being cautious. With the stock closing at $25.35 today (down 4.91%) and further weakness a distinct possibility, a very attractive entry point might eventually be reached at around $22 to $23. It has been nearly a year since the stock has seen that level and it looks like the shares would find support there. This could be a good opportunity to buy a quality company at a reasonable price.

Sources: December 2007 Manufacturing ISM report and Barron's Tech Trader Daily

Disclosure: author owns no share of INTC

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